Second Estimate of GDP: Q4 October to December 2014

• UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.5% between Q3 2014 and Q4 2014, unrevised from the previous estimate of GDP published 27 January 2015

• GDP was estimated to have increased by 2.6% in 2014, compared with 2013, unrevised from the previously published estimate

• Between Q4 2013 and Q4 2014, GDP in volume terms increased by 2.7%, unrevised from the previously published estimate

• GDP in current prices was estimated to have increased by 0.4% between Q3 2014 and Q4 2014

Change in GDP is the main indicator of economic growth. There are three approaches used to measure GDP.

Gross value added (GVA) is the sum of goods and services produced within the economy less the value of goods and services used up in the production process (intermediate consumption). The output approach measures GVA at a detailed industry level before aggregating to produce an estimate for the whole economy. GDP (as measured by the output approach) can then be calculated by adding taxes and subtracting subsidies (both only available at whole economy level) to this estimate of total GVA (more information on creating the preliminary estimate of GDP is available on the Methods and sources page of the ONS website).

The income approach measures income generated by production in the form of gross operating surplus (profits), compensation of employees (income from employment) and mixed income (self-employment income) for the whole economy.

The expenditure approach is the sum of all final expenditures within the economy, that is, all expenditure on goods and services which are not used up or transformed in the process i.e. final consumption (not intermediate) for the whole economy.

The second estimate of GDP is based on revised output data, together with data from some expenditure and income components. The output GVA and GDP estimates are balanced with the equivalent income and expenditure approaches to produce headline estimates of GVA and GDP. Further information on all three approaches to measuring GDP can be found in the Short Guide to National Accounts (105.5 Kb Pdf).

All data in this bulletin are seasonally adjusted estimates and have had the effect of price changes removed (in other words, the data are deflated), with the exception of income data which is only available in current prices.

Growth for GDP and its components is given between different periods. Latest year on previous year gives the annual growth between one calendar year and the previous. Latest quarter on previous quarter growth gives growth between one quarter and the quarter immediately before it. Latest quarter on corresponding quarter of previous year shows the growth between one quarter and the same quarter a year ago.

In line with national accounts revisions policy, the earliest period open for revision in this release is Q1 2014.

About the second estimate of GDP

The second estimate of GDP is produced around seven and a half weeks after the end of the quarter to provide a timely estimate of GDP. At this stage the data content of this estimate from the output measure of GDP has risen to around 80% of the total required for the final output based estimate. There is also around 50-60% data content available to produce estimates of GDP from the expenditure and income approaches.

Revisions are an inevitable consequence of the trade-off between timeliness and accuracy. The estimate is subject to revisions as more data become available, but between the preliminary and third estimates of GDP, revisions are typically small (around 0.1 to 0.2 percentage points), with the frequency of upward and downward revisions broadly equal.

The quality of the GDP estimate

All estimates, by definition, are subject to statistical uncertainty and for many well-established statistics, ONS measures and publishes the sampling error associated with the estimate, using this as an indicator of accuracy. The estimate of GDP, however, is constructed from a wide variety of data sources, some of which are not based on random samples and as such it is very difficult to measure the sampling error. While development work continues in this area, ONS like all other G7 national statistical institutes, does not publish a measure of the sampling error associated with GDP.

Figure 1: Quarterly growth and levels of GDP, table A2

Source: Office for National Statistics

Figure 1 shows GDP in the UK grew steadily during the 2000s until a financial market shock affected UK and global economic growth in 2008 and 2009. Economic growth resumed towards the end of 2009, but typically at a slower rate than the period prior to 2008. From the peak in Q1 2008 to the trough in Q2 2009, GDP decreased by 6.0%. This can be compared to previous economic downturns in the early 1980s and early 1990s which saw lower levels of impact on GDP (see Figure 2). In the early 1990s downturn, GDP decreased by 2.2% from the peak in Q2 1990 to the trough in Q3 1991. In the early 1980s downturn, GDP decreased by 5.6% from the peak in Q2 1979 to the trough in Q1 1981.

From Q3 2009 growth continued to be erratic, with several quarters between 2010 and 2012 recording broadly flat or declining GDP. This two-year period coincided with special events (e.g. severe winter weather in Q4 2010, the Diamond Jubilee in Q2 2012) that are likely to have affected growth. Since 2013, GDP has grown steadily, with the economy exceeding pre-downturn peak levels in Q3 2013.

The latest figures for Q4 2014 show the UK recovery continuing, with GDP in real terms growing by 0.5% compared with the previous quarter; by 2.7% between Q4 2013 and Q4 2014, and by 2.6% between 2013 and 2014.

Annex A (31 Kb Excel sheet) contains growth rates back to Q1 2013.

The output components of GDP show increases in Q4 2014 for agriculture, forestry and fishing, production and services. The only component to decrease was construction.

Production output increased by 0.1% in Q4 2014 compared with Q3 2014, revised up 0.2 percentage points from the previously published estimate. Within the production sub-industries, output from mining and quarrying, including oil and gas extraction, rose by 0.5%; manufacturing (the largest component of production) increased by 0.2% (see Figure 3), while electricity, gas, steam and air conditioning, and supply industries fell by 2.7%. Water supply and sewerage rose by 0.5%.

When comparing Q4 2014 with Q4 2013, production output rose by 0.8%. Manufacturing was the only production component to have increased between these periods, growing by 2.4%, while mining and quarrying, electricity, gas, steam and air conditioning, and supply industries and water supply and sewerage contracted by 2.2%, 4.3% and 3.4% respectively.

Construction output decreased by 2.1% in Q4 2014, revised down 0.3 percentage points from the previously published estimate. Construction output has risen by 4.7% since Q4 2013.

The service industries grew by 0.8% in Q4 2014 (see Figure 4), unrevised from the previous estimate, marking the eighth consecutive quarter of positive growth. This follows a 0.8% increase in Q3 2014.

Output of the distribution, hotels and restaurants industries rose by 1.3% in Q4 2014, unrevised from the previous estimate and follows a 0.8% increase in Q3 2014. The 1.3% increase in the latest quarter was largely due to retail trade, except of motor vehicles and motorcycles.

Output of the transport, storage and communication industries rose by 1.3% in Q4 2014, revised up 0.2 percentage points from the previously published estimate; this follows another 1.3% increase in Q3 2014. The largest contributors to the growth were computer programming, consultancy and related activities.

Business services and finance industries’ output rose by 0.9% in Q4 2014, unrevised from the previously published estimate, following a 0.9% increase in Q3 2014. The largest upward contribution to growth in Q4 2014 came from architectural and engineering activities; technical testing and analysis.

Output of government and other services was flat in Q4 2014, unrevised from the previously published estimate and follows a 0.3% increase in Q3 2014.

Further detail on the service industries’ lower level components can be found in the Index of Services statistical bulletin published on the same day as this release.

Gross value added excluding oil and gas extraction rose by 0.6% in Q4 2014, and by 0.7% in Q3 2014.

Figure 5 shows the path of GDP and its headline industries (this excludes agriculture, and includes manufacturing which is a sub-component of production) relative to their level of output achieved in Q1 2008. In the decade prior to the downturn, the services industry is shown to have grown steadily, while production output was broadly flat over the same period. Construction activity grew strongly in the early part of the decade, and although there was a temporary decline in the mid-2000s; this was reversed by the end of 2007.

Industries have shown differing trends following the recent economic downturn. The construction, manufacturing and production industries (including manufacturing) were more acutely affected by the deterioration in economic conditions, with output falling between 2008 and 2009 by 13.2%, 9.4% and 8.8% respectively. In contrast, output in the service industries only fell by 2.9% between 2008 and 2009.

Production activity began to grow in 2010 - with manufacturing and the construction industry showing particular strength - but both industries did not sustain this growth. Production output fell in both 2011 and 2012, falling below levels seen at the depth of the downturn in 2009. Construction output also fell sharply in 2012, with output falling close to its 2009 trough following further contraction in Q1 2013. Construction output improved over much of 2014; however output declined in the most recent quarter. Although there has been widespread growth across all major components of GDP since the start of 2013, the service industries remain the largest and steadiest contributors to overall economic growth and are the only headline industries in which output has exceeded pre-downturn levels.

Figure 6 shows the average compound quarterly growth rate experienced over the five years prior to the 2008/09 economic downturn; the average growth rate experienced between Q3 2009 and Q2 2014 (five years following the downturn), and the current quarterly growth rate observed in the most recent period (Q4 2014). Compound average growth is the rate at which a series would have increased/decreased if it had grown/fallen at a steady rate over a number of periods. This allows the composition of growth in the recent economic recovery to be compared to the long run average. The UK experienced slightly slower average compound GDP growth in the five years following the economic downturn compared with the five years prior; this is also true of the service industries. In Q4 2014, only services outperformed post-downturn average rates of growth of the headline industry shown. Within services, the scientific, administrative and support industries have shown particular strength in the most recent quarter. Services growth has also been supported by the wholesale and transport industries.

It should be noted that the third column, in Figure 6, which shows the current quarterly growth rate, is based on only one data point. Consequently, users should use caution when making direct comparisons with the long run averages.

Annex B (35 Kb Excel sheet) contains expenditure component growth rates back to Q1 2013.

Gross domestic expenditure (the sum of all expenditure by UK residents on goods and services which is not used up or transformed in a productive process) was flat in Q4 2014, following a 1.3% increase in Q3 2014. Annually, between 2013 and 2014 gross domestic expenditure increased by 2.9%.

Household final consumption expenditure rose by 0.5% in Q4 2014 and has increased for fourteen consecutive quarters (see Figure 7). When compared with the same quarter a year ago, household final consumption expenditure has been rising each quarter since Q4 2011, and was 2.2% higher in Q4 2014 than in the same period a year ago. Between 2013 and 2014, household final consumption expenditure increased by 2.1%.

Government final consumption expenditure was flat in Q4 2014, following a 0.5% increase in Q3 2014. Between Q4 2013 and Q4 2014, government final consumption expenditure increased by 2.2%. Between 2013 and 2014, government final consumption expenditure increased by 1.5%.

Non-profit institutions serving households’ (NPISH) final consumption expenditure fell by 3.3% in Q4 2014, following a 1.1% increase in Q3 2014. Between Q4 2013 and Q4 2014, NPISH final consumption expenditure decreased by 0.6%. Annually, NPISH final consumption expenditure rose by 0.7% between 2013 and 2014.

In Q4 2014, gross fixed capital formation was estimated to have decreased by 0.5% (see Figure 8). Business investment was estimated to have fallen by 1.4% in Q4 2014. A large part of the fall in business investment came from a fall in investment by the oil and gas extraction industry.

However, over the longer term, business investment has been relatively strong. It increased by 2.1% compared with the same quarter a year ago, the nineteenth consecutive quarter of growth by this measure. It increased by 6.8% between 2013 and 2014, the largest annual growth since 2007.

More detail on gross fixed capital formation is available in the Business Investment statistical bulletin published on the same day as this release.

Including the alignment adjustment, the level of inventories increased by £3.6 billion in Q4 2014, following an increase of £4.5 billion in Q3 2014.

The trade balance deficit narrowed from £13.1 billion in Q3 2014 to £10.4 billion in Q4 2014 (see Figure 9). The trade position reflects exports minus imports. Following a 0.8% decrease in Q3 2014, exports rose by 3.5% in the latest quarter, while imports increased by 1.3% following a 1.4% increase in Q3 2014. Between 2013 and 2014, exports increased by 0.4% while imports increased by 1.8%.

Figure 10 shows the quarterly contribution of the expenditure components to the growth of GDP in chained volume measures. The largest contribution to growth came from net trade which contributed 0.6 percentage points to GDP, followed by household final consumption expenditure which contributed 0.3 percentage points. General government final consumption expenditure contributed 0.0 percentage points to GDP while gross fixed capital formation and NPISH made negative contributions of 0.1 percentage points. Changes in Inventories, excluding the alignment adjustment, made the largest negative contribution to GDP at 0.2 percentage points.

Annex D (24.5 Kb Excel sheet) contains implied deflator component growth rates back to Q1 2013.

The gross domestic product implied deflator at market prices for Q4 2014 is 1.1% above the same quarter of 2013 (see Figure 11). The GDP implied deflator is calculated by dividing current price (nominal) GDP by chained volume (real) GDP and multiplying by one hundred to convert to an index. It is not used in the calculation of GDP; the deflators for expenditure components, which are the basis for the implied GDP deflator, are used to calculate nominal GDP not real GDP.

Annex C (31 Kb Excel sheet) contains income component growth rates back to Q1 2013.

GDP at current market prices rose by 0.4% in Q4 2014, following a 0.6% increase in Q3 2014. GDP at current market prices rose by 3.8% when compared to Q4 2013. In 2014, GDP at current market prices rose by 4.4%.

Compensation of employees – which includes both wages and salaries, and pension contributions – increased by 1.2% in Q4 2014, following an increase of 1.3% in Q3 2014 (see Figure 12). Between 2013 and 2014, compensation of employees rose by 3.2%.

The gross operating surplus of corporations – effectively the profits of companies operating within the UK – including the alignment adjustment, fell by 2.6% in Q4 2014 compared with the previous quarter; this follows a decrease of 1.0% in Q3 2014 (see Figure 13). Between 2013 and 2014 the gross operating surplus of corporations rose by 4.0%.

Taxes less subsidies on products and production rose by 2.5% in Q4 2014, following a decrease of 0.6% in Q3 2014. Between 2013 and 2014 taxes less subsidies on products and production rose by 4.7%.

Figure 14 shows the contribution made by income components to current price GDP during Q4 2014. The positive contribution to growth came mainly from two of the components, with contributions from compensation of employees and taxes less subsidies on products and production of 0.6 and 0.3 percentage points respectively. Other income contributed 0.0 percentage points to GDP while gross operating surplus of corporations contributed a negative 0.6 percentage points.

At the time of preparation for this GDP statistical bulletin, the estimates quoted in this international comparison section were the latest available estimates published by the respective bodies (referenced) and may subsequently have been revised.

All areas included within this international comparison saw positive GDP growth in Q4 2014 (see Table 2). The European Union (EU28) grew by 0.4%, the seventh consecutive quarter of positive growth, while the Eurozone (EU18) expanded by 0.3% (see Figure 15). When compared to Q4 2013, GDP for EU18 increased by 0.9%, while GDP for EU28 expanded by 1.3% (see Figure 16).

Between Q3 and Q4 2014, GDP for Germany increased by 0.7%, an acceleration of the 0.1% increase seen in Q3 2014. In contrast, GDP for France increased by 0.1%, slightly down on the 0.3% increase in Q3 2014.

GDP for the United States of America rose by 0.7%, a slightly lower increase than the previous two quarters, which saw GDP increasing by 1.2% in Q3 2014 and 1.1% in Q2 2014. Between Q4 2013 and Q4 2014, GDP for the United States of America rose by 2.5%. Q4 2014 saw positive 0.6% growth for the Japanese economy, following contraction in the previous two quarters. Between Q4 2013 and Q4 2014, GDP for Japan fell by 0.4%.

Figure 17 shows GDP for the UK, EU, the United States of America and Japan, all indexed to Q1 2008 (the pre-downturn peak in the UK) to allow comparison of each since that period.

More detailed information on these estimates can be found on the Eurostat website. Information on the estimates for the United States of America can be found on the Bureau of Economics Analysis website, while information on the estimates for Japan can be found on the Japanese Cabinet Office website.

GDP and components, previously published on 27 January 2015

Figure 18 shows quarterly revisions between latest and previously published estimates of GDP. The periods open for revision in this release are Q1 2014 onwards.

Detailed revisions for the three GDP approaches:

• Output revisions are shown in Annex E (41.5 Kb Excel sheet) of this release

• Expenditure revisions are shown in Annex F (38 Kb Excel sheet) of this release

• Income revisions are shown in Annex G (33.5 Kb Excel sheet) of this release